The Relationship between Revenue Management and Pricing Strategies in Research Paper

The Relationship between Revenue Management and Pricing Strategies in Airline Industries - Research Paper Example This essay discusses that Revenue Management (RM) falls under the dynamic pricing models. There are several terms used to describe revenue management. The most common on is yield management, or a combination of several terms such as Price and Revenue Management (PRM), or Perishable asset revenue management (PARM). It normally describes a pricing method where the cost of buying the product or service changes over time to take advantage of the variation in consumer willingness to pay a certain price for the product. Depending on the industry, the prices either increase or decrease with time. In the electronics market for instance, the price of a product is normally higher during the launch compared to the prices charged after some time. In the airline industry, prices typically increase towards the scheduled time of the flight. Pricing strategy refers to the framework that a producer uses to set the prices for a particular product. Pricing strategy is very crucial because it affects th e potential for success of a product. The most basic pricing model is unit cost pricing model, which assigns the price of an item based on the cost of production and the expected margin. Pricing is not normally a straightforward affair because forces of supply and demand affect it. The price of an item tends to be closer to what the market is willing to pay for than the simple arithmetic of cost of production and margin. Dynamic pricing models tend to seek to maximize revenue based on the prevailing demand. In some cases, dynamic pricing actually disregards the cost of production. ... In some cases, dynamic pricing actually disregards the cost of production. In the case of the airline industry, unit cost is an unstable way of organizing pricing because of the large upfront cost Revenue management is the most dominant pricing model in the airline industry because of its potential to boost profitability in that particular industry. It came about after the liberalization of the industry in the late seventies. Airline executives found themselves in a tight spot because of increasing competition in the fledgling industry. They sought to find ways of increasing the profitability of the airlines in the industry based on their existing carrying capacity. However, the airline industry is not the only industry that uses yield management. The hotel industry also uses it and other industries such as printing firms, bus companies, car hire firms and private lodges also use it to maximize revenue against a backdrop of fixed capacity and highly perishable products (Koenig & Meis sner 2011). The goal of this paper is to investigate the relationship between revenue management and pricing within the airline industry. In the first part, the discussion will seek to examine the important issues surrounding revenue management, followed by an analysis of how those factors affect pricing strategy in the second part. Literature Review The Concept of Revenue Management There is a wide variety of terms, concepts, and approaches to the study of revenue management. Some scholars use all the related terms interchangeable stressing the greater meaning of time sensitive pricing. Older researchers used yield management and revenue management to mean the same thing (Boella 2000; Bieger & Agosti 2005). Recent